L8-9: Mergers & Acquisitions Flashcards
What are the motives behind acquisitions?
- Primary motive: Create additional shareholder value (but 50-80% fails).
- Secondary motive: Corporate strategy for growth and profitability (means to achieve the primary motive).
- Hidden motives: May not fully correspond with the primary motive.
What are some examples of hidden motives for acquisitions?
- To buy or to be bought (fear)
- Everyone else is buying
- If I don’t buy, my competitor will
- It’s the last chance to buy something
- Creating an empire
- Show ability to act
- Media pressure
- Pressure from financial intermediaries
What does acquiring a company for 10% more than the registered share price imply?
The acquirer will need to improve all future cash flows by 10% to make this work for them as an acquirer.
What perspectives do we take on for consolidated financial statements?
- As if a group of companies is one company.
- As if the parent company acquires the subsidiary’s assets and liabilities.
→ Subsidiary’s A and L valued at estimated consolidated acquisition cost. Often estimated using fair value at the acquisition date; the amount to which an asset may be transferred (or a liability settled) between two independent and knowledgeable parties in a situation where both parties voluntarily want to complete the transaction.
Does debt or cash financing matter for ROE?
Not when the interest rate on saving and borrowing is the same (also same net debt)
What is financing through new issue of shares like?
Like combining the two individual balance sheets - creating a weighted average
Does the form of financing or the price paid have greater effect on financial position?
The financing - damage is already done there. But price can have a substantial effect on reported profitability
What are the tax differences between direct and indirect acquisition when higher acquisition cost (than book values) is attributed to assets which are depreciated?
The group’s depreciation is greater than the depreciation in the subsidiary.
- If A acquired directly: the parent company would have had tax deductible depreciation based on that higher amount.
- Indirectly through an acquisition of shares: does not affect parent’s depreciation, but indirectly the group. Assuming the tax base of these assets correspond to their book values in the subsidiary, the remaining tax deductible depreciation is lower than what would be the case if there had been a direct acquisition. Hence, an indirect acquisition entails a tax disadvantage in comparison to a direct acquisition amounting to the value of these tax differences during the remaining depreciation period.
→ Such tax differences could be recorded as a deferred tax liability in the consolidated balance sheet at acquisition.
What are two possible explanations for paying more than book value?
- Abnormal profits are expected in the acquired company.
- The acquisition is expected to lead to synergies.
What are some approaches to measuring the outcome of acquisitions?
- Development of financial ratios compared to a control group growing organically. Look at the full spectrum of ratios, not only one.
- Development of share price.
- Ask managers in the acquiring firm.
What are the rules for goodwill under IFRS?
No amortisation under IFRS, but impairment tests
Is there a tax (cash) effect on goodwill impairment?
No, since it only exists on group level, and the group is not a tax subject.
What does any valuation of goodwill hinge on?
Valuation of other assets (residual). FVs
What are the steps of goodwill impairment tests?
- Test on a CGU level (the lowest possible level to isolate cash flows from others). There is an original allocation process of goodwill to the entity. Some groups argue they only have 1 CGU (the entire group).
- Define the recoverable amount. Make the calculations on the level of the particular CGU.
- FV: sell on market, obtain some transaction based amount, difficult to determine (what to get for selling the CGU).
- VIU: what cash flows will this CGU generate? CGU → operating cash flows. - Compare to book value. Impair if recoverable amount is lower than the carrying amount
Why may we get a biased value for goodwill impairment even if the management is unbiased in their predictions about the future (value in use CGU calculated correctly)?
If the other assets are not measured at fair value (for example at book value). Using book value is often the real-life approach, since it costs too much to value all other assets to FVs to get a fair value of goodwill.
→ we will not see as many goodwill impairments as we would expect.
